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What does the 2018 real estate market have in store?

13 December 2016 by National Bank
real estate trends 2018

You’re thinking about buying or selling a property, but you’re wondering if now is the right time? How is the current real estate market performing and what surprises are in store for the rest of the year? Here’s our roundup of five big real estate trends.

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1 Tighter mortgage rules

In the real estate market, 2018 started with the tightening of mortgage rules. To get a loan now, all home buyers must pass a stress test to evaluate if they could keep making their payments if mortgage rates went up. The test can be done in two ways:

  • By applying a 2% increase to the rate offered by the financial institution backing the mortgage

  • Or by using the Bank of Canada’s prime rate for a five-year fixed mortgage (if the benchmark rate is higher than the 2% increase)

    Since 2016, such stress tests have been mandatory for buyers who don’t have a 20% down payment for their property, but since January 2018, all buyers must take the test, regardless of their down payment.

    Several players in the market have already adapted to the new rules. “Our advisors know how to prepare clients when they’re buying a home,” says Louis-François Ethier, Mortgage Director with National Bank. “They offer mortgage pre-approval based on the increased rate so that clients know the maximum amount that they can borrow to shop for their home in total confidence.”

2 Temporary downturn in real estate sales  

The rule tightening has had an impact on property sales. “We saw an increase in the number of sales in the Canadian real estate market last November and December, and then a decrease in January and February, with buyers advancing their purchase decision before the new rules came into effect. This situation was amplified in Vancouver and Toronto, where prices are higher and where a foreign investment tax was recently imposed to keep the prices from skyrocketing,” says Louis-François Ethier.  

At the same time, we also saw a small impact of the rule tightening in Quebec. “There was a drop in sales at the beginning of the year in Quebec compared to last year, but it was more moderate than elsewhere in Canada,” says the expert.  

The impact of the tighter mortgage rules may, however, be short-lived. “Some homebuyers will likely to stay on the sidelines amid heightened housing market uncertainty and continue saving a larger down payment before purchasing, resulting in lower sales in the first half of 2018 followed by a modest rebound in the second half of 2018 as housing market uncertainty fades.”says the Canadian Real Estate Association (CREA).

3 Rising interest rates  

The Canadian economy is doing particularly well. The real gross domestic product (GDP) grew 3% last year, its strongest pace since 2011. Such results have an impact on interest rates, which also go up. The Bank of Canada raised its interest rate twice in 2017 by 0.25 of a percentage point each time, followed by another hike in January 2018.

“We haven’t seen a situation like this in over 10 years, and we’re expecting to see even more hikes before the end of the year,” says Louis-François Ethier. These hikes, in turn, raise the mortgage rates offered by the big financial institutions.

At the same time, economists agree that abandoning NAFTA would have a negative impact on the Canadian economy. With less commercial trade between Canada, the United States and Mexico, the Canadian GDP would shrink.  

Kevin Hugues, a regional economist for Quebec at the Canadian Mortgage and Housing Corporation (CMHC), also believes that we need to consider the American situation to understand how interest rates are going to evolve. “Canada is always influenced by the American economy,” he says.” The U.S. economy was relatively strong last year and that had repercussions here. The interdependence of our two economies also means that Canadian monetary policy cannot ignore what’s happening in the United States. We have no choice but to follow the NAFTA negotiations very closely.”

4 Housing price controls  

At the beginning of 2018, the real estate market saw a drop in both the number and the average price of houses sold. This was chiefly due to the Ontario and B.C. markets, where measures were put in place to stop prices from rising.  

The average price of properties sold in Canada is also down because of fewer high-end residential transactions in Vancouver and Toronto. For 2018, the CREA is forecasting a 2.3% drop in the national average price of homes, down to a little more than $498,100. In Eastern Ontario, however, they predict that house prices will go up.  

5 Drop in sales followed by a lift  

For the entire Canadian market, the CREA is predicting that sales across the country will drop by 7% in 2018.  

“The decline reflects weaker sales in B.C. and Ontario, amid heightened housing market uncertainty caused by provincial policy measures, high home prices, ongoing supply shortages and tightening mortgage stress tests as interest rates rise,” says the CREA in its March quarterly forecast.  

However, the market should see an upswing soon, especially in Toronto.  

“As we move further into the spring and summer months, growth in sales and selling prices is expected to pick up relative to last year. Expect stronger price growth to continue in the comparatively more affordable townhouse and condominium apartment segments. This being said, listings supply will likely remain below average in many neighbourhoods in the Greater Toronto Area, which, over the long-term, could further hamper affordability,” said Jason Mercer, Toronto Real Estate Board’s director of market analysis.  

In the longer term  

Kevin Hugues is keeping close watch on an element that could stir things up: the aging population. “Will older people stay where they are or, as we’re already starting to see, will they sell their homes and move into apartments, condos, rental units or retirement homes?” Such a trend requires the industry’s close attention, as it could have major repercussions in terms of market supply.  

Because of the Ontario and B.C. markets, the CREA is forecasting a partial recovery of sales over the second half of 2018, followed by a gradual cooling of the Canadian market in 2019. The organisation is forecasting that the national average price will rebound by about %3 to $513,300 in 2019.

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